Thursday, March 3, 2011
Doing the Math on a Heartsy Deal
A few days ago, I came across the handmade version of Groupon - Heartsy. Similar to Groupon, Heartsy connects with sellers on Etsy and offers their products at a discount of at least 50% off. While Groupon splits the proceeds of the deal with the retailer, Heartsy’s services are currently free but they are planning on incorporating a transaction fee in the near future as they grow.
After I discovered Heartsy, I was curious what the Etsy community thought about it. I searched through the forums and found many sellers with mixed emotions. Those featured on Heartsy before had only great things to say about it, but others felt that such a huge discount would leave them with nothing while giving their product away for free. Being a math person, it really made me wonder if they were right. This reminded me of an article I read in the New York Times last year about doing the math on Groupon and figuring out whether participating in such deals is good for your business or not. So using a similar model, I decided to do the same for Heartsy.
There are nine key factors that an Etsy seller should consider:
1. Incremental cost of sales - how much does it cost you to make an item to get one additional sale? This doesn't fixed costs. If you are selling vintage, it could be 30%; jewelry might be 50-60%; bath and body products might be 40%.
2. Amount of average sale - will buyers stick to the total amount offered in the coupon, or will they spend more than that?
3. Redemption percentage - the percentage of people buying the coupon and actually using it.
4. Percentage of coupon buyers that are already your customers.
5. Percentage of coupon buyers that will become regulars.
6. What is the advertising value of promoting your business to 500 people - how much do you spend on ads on Facebook or other blogs for example?
7. Cost to acquire a new customer
8. Etsy fees
9. PayPal fees.
[For simplicity purposes, this model assumes that a customer buys only one coupon.]
So now let's go through an example. Suppose you offer $19 for $40 store credit (53% discount) and you sell 40 coupons. Following the list from above, let's say your business numbers are:
2. $45 (buyers spend $5 more dollars than the coupon value)
9. $0.30 plus 2.9%
Coupons redeemed = 40.
Revenue: 40 x $19 = $760
(this will be different if Heartsy starts charging a fee)
Additional revenue: 40 x $5 = $200
Total revenue = $960
Expense: 40 x $45 (average sale amount) x 50% incremental cost = $900
Etsy fees: 40 x $45 x 3.5% = $63
PayPal fees: 40 x ($0.3 + 2.9% x $5 (additional value over coupon)) = $18
Total expense = $981
In this example, the net revenue is -$21, which means it cost you to participate in the deal. However, it's important to look at other contributions to your business - how many new customers will you get? Assuming the return percentage is 10%, you get 40 x 10% = 4 new customers. This costs you roughly $5 per new customer, which is exactly what you were spending anyway (item 7). The overall cost is also similar to your current advertising cost. So now the question is whether it was worth going through this for just 4 new customers. In my opinion, yes, but you can make your own decision.
Of course, the end results could be drastically different if any of these key inputs change. For instance, if the amount of average sale was $50, or $10 over the coupon value, then you'd actually be making $66 in profit and still getting those 4 new customers. In another example, if your incremental costs are only 30%, then you'll be making $339 in profit. And of course, the opposite can happen too - if your costs are 60%, then you'll be paying $200 to participate in this deal.
You can really help or hurt your business, so it's really important to know your customers, your costs, and your limits. In the case of handmade products, it's also good to have a good inventory of items, especially if you're expecting people to go over the coupon value, as well as being able to accommodate a cluster of sales at the same time. But most importantly, make sure you price your items well. Heartsy's current model is similar to wholesale, but there are still sellers (and also due to the unique nature of some handmade products) who find it very difficult to achieve wholesale prices, if at all. If that's the case with your business, then you know the answer.
Now that I've done the math, I'm really curious to hear from sellers who were already featured and actually know what the exact numbers are.